Why Millennials are Choosing House Hacking Over the Starter Home
The concept of the starter home is purchasing your first home at a modest price point.
This is combined with the idea that after years of hard work & career growth, you will purchase your “forever-home”, that suits your family’s long-term needs.
Here’s the issue millennials know all too well: Many are not escalating in their careers financially at the same pace the real estate market has accelerated.
Houses are now viewed as an asset, business, & retirement plan. Enter House Hacking.
What is House Hacking?
House Hacking is having your cake, and eating it too.
It’s a mix between buying a personal residence & an investment property.
Simply put, House Hacking is buying a multi-unit property, & living in one unit, while renting the other(s) for supplementary income.
Here’s What Makes House-Hacking a Game Changer:
Dramatic Cost Savings
Mortgage payments can be expensive, having a separated unit paying rent will decrease your month-to-month costs, this is obvious, but consider this:
House Hacking will allow you to pay LESS month-to-month, even while buying a SIGNIFICANTLY more expensive house.
The following is a cost breakdown of buying a starter home for $300,000 vs a Multi-Unit Home for $400,000 as it relates to mortgage payments.
Disclaimer: These figures may not represent your exact market, however, it’s food for thought, and is a real example directly from a market in Ontario.
(If you don’t believe this is a real example - Feel free to reach out to me and I’ll give you the exact number breakdown, where the property is located, etc.…. Moving on.)
In this scenario – Purchasing a home worth $100,000 MORE can potentially SAVE you $1,000 per month in costs.
In addition to monthly savings – the versatility of house-hacking is big reason for it’s popularity.
Flexibility for the Unexpected
Your 20s & 30s bring significant changes in your life.
House Hacking provides the flexibility needed to create a living experience that suits your life as you evolve.
Want to save the most money possible? Live in the least desirable unit in your home.
Want the nicer suite? Rent out the less desirable unit.
Want the nicer suite & maximum money saved? Rent your less desirable unit, and get a roommate for your unit.
What if you’re only comfortable with exclusive access to the backyard & driveway parking?…You’re the landlord, specify the use of common spaces in your tenant’s lease.
Received a Job offer out of town, what now? Rent your unit out, move, and use the cash flow towards your rent elsewhere while you figure out your next move.
You love the neighbourhood & don’t want to move, but your family has grown….Convert multi-unit to a single family residence & stay in the neighbourhood you’ve grown to love.
The point is house hacking is extremely versatile, & won’t leave you stuck in one place facing a mountain of debt.
Financial Growth through Passive Income
This benefit could really be its own blog, I’ll try to keep it concise.
House hacking will to get to your second home faster, while allowing you to holdon to your first.
Increased Personal Savings
We now know that house-hacking decreases your month-to-month costs significantly. The result is you’re able to save more money faster, to allocate towards your next purchase.
Increased Principal Paid
While your personal month-to-month costs are lower, your mortgage payment itself is still higher.
As a result, you’re paying more principal towards your mortgage by choosing a more expensive property.
Using the scenario built out earlier, even though we pay $1000 less per month, we’re still paying just over $200 more principal per month.
The result is an additional $12,000 in equity paid down after 5 years (all while saving more month-to-month).
Increased Benefit from Appreciation
I’ll make this simple – If your $300,000 starter home & $400,000 duplex both appreciate by 6%, which makes a greater return? Of course, the $400,000 asset.
When you factor this is compounded year over year, the difference gets a lot larger.
Ability to Refinance & Maintain Cash Flow
If you purchase the correct property, you’ll be able to cash flow a healthy amount above your monthly expenses with all units rented.
Having a healthy cash-flow will allow you to refinance equity out of your existing home, and leverage that cash to place a down payment on your second property.
If you make enough cash flow above your expenses you’ll still be able to break even, or produce cash month-to-month on your first property with an increased mortgage payment from your refinance.
Building a portfolio of property as you upgrade from home to home will act as the building blocks towards your retirement, children’s future, or whatever projects are more inline with your goals.
Conclusion
Your month-to-month costs are determined by the type of home you buy, as much as the purchase price.
House-hacking is done by design, can suit any lifestyle, and will keep you flexible enough to pursue the many opportunities that will come your way in life.
House hacking allows you to save money now by paying less out of pocket month-to-month. In addition, you’ll pay down more principal in the process, and benefit more from appreciation.
House hacking allows you to enter the market with confidence, & build a sustainable portfolio of property as you periodically upgrade from home to home.
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